October 27, 2008


Global grain demand seen resilient amid recession


World demand for grain is seen to ride the recession and a sharp decline in prices could curb plantings and cut supply, which opens the door to a rebound in some markets.


Corn prices have halved in the last few months and wheat has tumbled steeply, taking some of the heat out of food price inflation, although there may be a time lag before the trend is fully reflected on the supermarket shelf.


Sudakshina Unnikrishnan at Barclays Capital in London said the current sharp fall in prices is "going to have a pretty quick response in terms of supply side" and "current prices especially the lows seen in the last couple of weeks are really sustainable."


Corn prices on the Chicago Board of Trade went down to as low as US$3.71 a bushel on the front month last week, less than half a peak of US$7.65 set in June.


Increasing input costs, particularly fertilisers, could discourage farmers from planting grains with margins squeezed by the drop in prices.


Unnikrishnan predicted that a potential loser from the fertiliser price hikes could be corn.


CBOT wheat prices have also fallen steeply in the last few weeks, dipping to US$4.96-1/2 a bushel on the front month on Friday (October 24), sharply below a peak of US$13.34-1/2 in February.


According to Dirk Jan Kennes, an analyst with Rabobank in Utrecht, the Netherlands, there might be a possibility that farmers plant less wheat due to pressure of their margin outlook driven by extreme price decreases seen over the last four or five weeks.


Weaker Chinese demand has helped to drive sharp falls in the prices of some commodities, particularly industrial metals, but the outlook is much more robust for grains due to its growing meat demand.


He Xuegong, chief analyst with Beijing Orient Agribusiness Consultant Ltd. said there is unlikely an impact of Chinese grain demand from the global financial crisis and whether China's economy is growing by single digit of faster growth, meat consumption is rapidly growing with some meat products like beef are still in short supply.


One of the things that may happen as a result of lower prices is that the (Chinese) government may replenish some of their grain stocks, said Brady Sidwell, an analyst with Rabobank in Hong Kong.


Some consumers, particularly in developing countries, may, however, turn away from meat as the economic crisis bites.


James Dunsterville, analyst at Geneva-based Agrinews, said an economic slowdown may be more bearish for demand for corn than wheat which is less reliant on demand from the feed sector.


He said a common housewife will go for pasta and bread before going for meat.


The drop in prices has made grain more affordable for importers although the economic crisis could eventually make it more difficult for some countries to borrow money to finance their purchases, said Andree Defois, an analyst at France's Strategie Grains.


Food price inflation is also starting to slow.


Unnikrishnan said a combination of lower food and fuel prices has helped to curb the whole inflationary story. In terms of food prices, however, she said there is always a lag "between the prices of the underlying (commodities) and retail prices reflecting that change."


The US Department of Agriculture forecast this week that US food prices were expected to surge 5.5 percent in 2008, their largest increase in two decades, and rise by 4.5 percent in 2009.
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